Risk Management 101- How Define a Risk

What is Risk Management?

One of the unsung / underutilized aspects of project management is Risk Management.  The objective of this process is to identify all the risks that thwart a project’s objectives. Often risk is confused with probability of an undesired outcome, such as the chance that a key resource might quit before the project is complete. Or, a risk is confused with an issue which is a risk that has already occurred.

The purpose of risk management is not to eliminate risk, which is impossible, but to sway the factors that influence the likelihood that the risk would occur and, if it does manifest itself, to either lower the likelihood of an impact or to reduce the level of loss.

What is a Risk?

 To get started, effective risk management requires we define risk much more specifically to include three key components of risk: 1) uncertainty, 2) loss, and 3) its time component.

Uncertainty

A risk always has uncertainties which cannot be eliminated.  If there is no uncertainty, than the risk is really an issue which follows a different management path.  However, we can quantify the level of uncertainty by assigning a probability and identify the factors in the environment that influence the probability. These are called risk factors.

Loss

A risk always has the change of a loss; if there is no possibility of a loss, than it cannot threaten the project so we remain unconcerned.  When the risk occurs, there is a possibility that the outcome might actually be positive (think investing in the stock market).  Some risk management, especially in investment analysis, tries to maximize the positive return; for project management, we’re mostly concerned with the events that might produce negative outcomes which threaten the project’s objectives.

Time Component

Most people have difficulty grasping the time dimension to a risk. For every risk, there is a time when the risk either manifests itself and becomes an issue, or doesn’t manifest itself and the threat has passed. If there is no time component, than the event is more an ongoing “condition of doing business”.  For example, the threat of competition is always present in any business endeavor.  However, if a new competitor is entering the market or introducing a new product that could threaten your market share, there may be a time component and this a manageable risk.

The Two Mistakes Teams Most Often Make

The first common mistake development/project teams make is to wait until late in the project when risks start appearing. The second mistake is to let risk management lapse, i.e. spend hours identifying risks for the project charter, only to put them aside to “get on to the real work in the project”.   In both cases, once risks start occurring the teams are unprepared to handle the risks as well as embarrassed!

The antithesis of risk management is “fire-fighting”. That is, let risks occur and then send your best and brightest out to clean up the ensuing mess. Unfortunately, this has become ingrained in the culture of many organizations and the fire-fighters are often regarded as heroes and rewarded.

Summary

Risk management means being proactive; it is the opposite of firefighting.  The purpose is not to eliminate all risks but to influence the factors in the environment that contribute to the risk occurring and to its impact and level of loss.

Next – How to Identify Risks in Your Organization

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One Response to “Risk Management 101- How Define a Risk”

  1. gravitygarden Says:

    The executive leadership team or project champion owns the project and is therefore responsible for helping the rest of the organization to understand the vision and the reasoning behind the effort. The charter is the tool that can help bring a consistent message to the team and all the stakeholders that may be impacted.

    The PM is the one that needs to assist the executive or champion in defining the charter to help get the message out. Many members of the team may often feel overwhelmed and out of touch as to why change is necessary. The project charter can help them understand and get past the “why” and move on to “how” the plan will positively affect the organization. This, in turn will help them to stay focused on the tasks that need to be accomplished in order for the project to be successful.

    http://gravitygarden.com/project101/project-management-charter.html

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